Treasurys mixed as Fed decision, budget talks loom

Fiscal cliff, Fed seen keeping rates from rising much

DeborahLevine

LOS ANGELES (MarketWatch) — Treasury prices were mixed Monday, with investors considering a report of weak monthly U.S. manufacturing activity as they wait for key jobs data that could play a role in a decision by the government to keep buying debt.

But the biggest issue hovering over the market is negotiations between lawmakers and the White House over U.S. tax and spending measures, which haven’t progressed much.

It is fair to characterize Monday’s price action “as a choppy move or noise ahead of the more important events,” including the coming release of the monthly U.S. jobs report and the unemployment rate, said government bond strategists David Ader and Ian Lyngen at CRT Capital Group, in a note, “although we’ll offer the caveat that Treasuries did find a solid bid in the wake of the disappointing ISM figures that left the market largely unchanged on the day.”

Treasury prices, which move inversely to yields, had moved slightly higher after data indicated manufacturing activity in the United States shrank in November and fell to its lowest level since July 2009, hit by a drop in new orders and reduced hiring plans. The Institute for Supply Management’s ISM index fell to 49.5% from 51.7% in October. A reading under 50 indicates contraction.

Yields on 10-year notes
US:10_YEAR
edged up 1 basis point to 1.63%. A basis point is 1/100th of a percentage point.

The market saw minor selling early Monday, coming off support that stemmed from demand as November came to an end, according to John Canavan, bond-market analyst at Stone & McCarthy Research Associates.

Prices were also weaker earlier Monday following positive manufacturing data from China, the world’s second-largest economy, and on good reception to the beginning of Greece’s debt buyback.

Investors in the near term are looking toward the November U.S. jobs report due Friday, with that data to arrive ahead of the Federal Reserve’s interest rate meeting next week.

Treasury Secretary Timothy Geithner and House Speaker John Boehner solidified their stances on the fiscal cliff on Sunday, but Geithner predicted Republicans will in the end accept higher tax rates and reach a budget deal. Read: Geithner predicts GOP will accept higher taxes.

This would be in addition to its program of buying mortgage bonds each month in an effort to ease financial conditions enough to lower the unemployment rate.

“Once that announcement comes [from the Fed], then we might see a little bit of better selling pressure on Treasurys just on the ‘buy-the-rumor, sell-the-fact’ type trade,” said Canavan. “In other words, Fed purchases really are largely priced in at this point. But that doesn’t mean people are willing to start selling the market until they actually see the statement itself.”

The central bank’s last Federal Open Market Committee meeting of the year will be held on Dec. 11 and 12. Before that, the U.S. will release its employment report for November.

Analysts polled by MarketWatch currently expect the addition of 80,000 nonfarm payroll jobs in November, with the numbers to be influenced by Superstorm Sandy that hit the East Coast in late October.

Analysts at Barclays said they expect “safe-haven yields to remain resilient into year-end, given that [fiscal-cliff] negotiations are likely to be protracted.”

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